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ARBITRATING PROFESSIONAL LIABILITY & HEALTHCARE CASES:

WELCOME TO THE WILD WEST

D. Jay Davis, Jr.1 J. Camden Hodge

Arbitration is fast becoming a preferred alternative to traditional state-court litigation, and

the reasons for its allure are legion. Arbitration offers the promise of a less expensive, expedited

process of dispute resolution, the proceedings are private and often cloaked with the protection

of a confidentiality order, and the vast majority of arbitration awards are final and offer no or

very limited rights of appeal. Because arbitrators are usually lawyers and usually have specific

subject matter expertise, there exists less a belief that measured decisions will follow without the

potential exposure to punitive damages and the unpredictability inherent in jury trials. Resolving

a case in an arbitral forum also has the benefit of getting your client out of potentially plaintiff-

friendly jurisdictions.

Despite the commonsense benefits of arbitrating your dispute, arbitration brings with it

its own unique set of possible problems. For example, anecdotal evidence suggests that

arbitrators do not often render a “pure” defense or plaintiff’s verdict. The parties are paying

arbitrators for their service, after all; accordingly, parties often worry that arbitrators will “split

the baby” in issuing an award in hopes of keeping both parties relatively happy and encouraging

repeat business. Further, even the pros of arbitration can cut both ways. While arbitration

typically affords the parties the certainty that an award or verdict is final because of the limited

1 This article was prepared by D. Jay Davis Jr. and J. Camden Hodge, both of Young Clement Rivers, LLP in Charleston, S.C. Jay is chair of the firm’s Professional Liability and Banking and Business Litigation practice groups, and Camden serves as an associate. The authors can be reached at jdavis@ycrlaw.com and chodge@ycrlaw.com

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appellate rights of parties to arbitration, this “benefit” can sting in the event that the arbitrator

rules in favor of your opponent. Moreover, there always exists the possibility that your “neutral”

arbitrator or panel of arbitrators has a proclivity for the not sending a plaintiff home empty-

handed because they know the time and costs incurred. The fact that the rules of evidence and

procedure typically are relaxed in arbitrations and that discovery often is significantly limited

also can present significant problems. While limited discovery can cut litigation costs

substantially, it also can make preparing for the arbitration a special challenge fraught with

potential surprises.

While your client may have a burning desire to arbitrate the dispute, the decision should

be carefully examined with an eye toward the likely potential of an award being rendered of

some firm. Accordingly, this paper will explore a number of methods to get your case out of

court and into arbitration. It also will discuss the process of navigating the arbitral proceedings,

as well as the possibility of having your case adjudicated by a judge during a non-jury trial.

THE APPLICATION OF THE FEDERAL ARBITRATION ACT GENERALLY

Compelling arbitration requires an understanding of the Federal Arbitration Act (“FAA”).

The text of the FAA reflects the overarching principle that arbitration agreements are a matter of

contract that must be must rigorously enforced by courts according to the agreement’s terms.2

By its plain language, the FAA applies to contracts concerning maritime transactions and those

“involving interstate commerce,” mandating that such written arbitration agreements “shall be

valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the

2 Am. Exp. Co. v. Italian Colors Rest., 133 S. Ct. 2304 (Scalia, J) (2013); 9 U.S.C.A. § 2.

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revocation of any contract.”3 The FAA states that unless the parties have contracted to the

contrary, it applies in federal or state court to any arbitration agreement regarding a transaction

that in fact involves interstate commerce, regardless of whether the parties contemplated an

interstate transaction or not.4 Arbitration agreements must be placed on an “equal footing” with

other contracts, and courts are charged with both enforcing and protecting the “liberal federal

policy favoring arbitration.”5 There is a “heavy presumption of arbitrability,” requiring that

when the scope of the arbitration clause is open to question, a court “must decide the question in

favor of arbitration.”6

Accordingly, the FAA provides that a “party aggrieved by the alleged failure, neglect, or

refusal of another to arbitrate under a written agreement for arbitration may petition any United

States district court…for an order directing that such arbitration proceed in the manner provided

for in such agreement.”7 A district court may compel arbitration if the movant demonstrates:

(1) the existence of a dispute between the parties; (2) a written agreement that includes an

arbitration provision which purports to cover the dispute; (3) the relationship of the transaction,

which is evidenced by the agreement, to interstate or foreign commerce; and (4) the failure,

neglect or refusal of the defendant to arbitrate the dispute.8

HOW TO COMPEL AN UNWILLING PARTY TO ARBITRATE

I. THE FEDERAL COURT APPROACH…SUE ‘EM BACK

3 9 U.S.C. § 2 (2000). Also note that § 1 of the Act establishes that its provisions do not apply to employment contracts of “seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 4 9 U.S.C.A. § 1; Munoz v. Green Tree Fin. Corp., 343 S.C. 531, 538-39, 542 S.E.2d 565, 568 (Ct. App. 2002). 5 AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1745, 179 L. Ed. 2d 742 (2011); Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). 6 Levin v. Alms and Assocs., 634 F.3d 260, 267 (4th Cir 2011) (internal quotations omitted) (emphasis added). 7 9 U.S.C.A. § 9. 8 Am. Gen. Life & Accident Ins. Co. v. Wood, 429 F.3d 83, 87 (4th Cir. 2005).

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One method of enforcing an arbitration agreement is to file a separate

federal action against the plaintiff in the underlying action. You will need of course a basis for

Federal Jurisdiction. The process of compelling an unwilling party to arbitrate should begin as

soon as the Plaintiff files suit in state court. In short, after the state court complaint is filed

against your client, you should: (1) send the plaintiff a formal demand letter stating that all

claims related to the lawsuit must be submitted to arbitration per the arbitration agreement; (2)

find a jurisdictional basis to file a federal compliant to compel arbitration and (3) simultaneously

file a motion to stay in the state court action.

A. The Demand Letter

Before a district court can compel an action to arbitration, a Plaintiff must fail, neglect, or

refuse to arbitrate the dispute.9 By sending the Plaintiff a letter or even an email demanding that

the dispute be arbitrated, you are forcing Plaintiff to respond, in writing, with her position as to

arbitration. If Plaintiff agrees to arbitrate, great. If she refuses, you now have written proof that

Plaintiff rejected your offer to arbitrate the dispute. You also have created a justiciable

controversy for the court to resolve.

B. The Federal Complaint to Compel Arbitration and Stay State Court Proceedings

1. Venue and Jurisdiction

The federal complaint first must establish that the district court has jurisdiction over the

matter and that the venue is proper. Venue is proper in (1) the district where Plaintiff resides or

(2) the district where a substantial part of the events or omissions giving rise to the claims

asserted in the federal action occurred.10

9 See FN 7. 10 See 28 U.S.C. § 1391(a).

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The FAA states that the Motion to Compel Arbitration can be filed in “any United States

district court which, save for such agreement, would have jurisdiction under Title 28.”11

Although the FAA is a federal act, the Supreme Court of the United States holds that the FAA

alone does not confer federal question jurisdiction.12 Instead, there must exist some other,

independent jurisdictional basis for a federal court to hear the claim.13 Clearly, federal

jurisdiction can be established by way of diversity jurisdiction under 28 U.S.C. § 1332(a) if full

diversity of parties exists. In the alternative, some courts will “look through” the federal

complaint and examine the underlying state court dispute already being litigating by the parties

in searching for federal question jurisdiction and, occasionally, for diversity jurisdiction.14

2. Existence of Arbitration Agreement

Next, you must show that there is a written agreement that includes an arbitration

provision which purports to cover the dispute.15 The federal complaint should explain that the

arbitration agreement was made between the Plaintiff(s) and Defendant(s). The arbitration

agreement should be quoted and attached to the federal complaint, and it should clearly illustrate

that the parties agreed to arbitrate. Your letter demanding arbitration and Plaintiff’s subsequent

refusal should be attached to the federal complaint. Plaintiff’s state court complaint also should

be attached and briefly described, as this proves that a genuine dispute exists between the parties.

11 9 U.S.C. § 4. 12 See Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 26 n.32 (1983) (“The Arbitration Act is something of an anomaly in the field of federal-court jurisdiction. It creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate, yet it does not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 or otherwise. Section 4 provides for an order compelling arbitration only when the federal district court would have jurisdiction over a suit on the underlying dispute; hence, there must be diversity of citizenship or some other independent basis for federal jurisdiction before the order can issue.”) 13 Id. 14 See Vaden v. Discover Bank, 556 U.S. 49 (2009). Most of the courts applying Vaden considered it limited to federal question cases, though some courts have suggested that Vaden could apply to diversity cases. Garner v. BankPlus, 484 B.R. 134, 139-40 (S.D. Miss. 2012) (collecting cases applying the “look through” approach only in federal question cases); but see Cytec Indus., Inc. v. Powell, 630 F. Supp. 2d 680, 686 n.2 (N.D. W. Va. 2009) (suggesting in dicta that the reasoning of Vaden could apply to diversity cases). 15 See FN 7.

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It is important not to seek any affirmative relief in state court other than to stay the action

pending a federal determination of the issues, so as to avoid Plaintiff making any waiver

arguments. You should also not delay your efforts to enforce the argument.

3. Relationship to Interstate or Foreign Commerce

Finally, your federal complaint must explain how the arbitration agreement relates to

interstate or foreign commerce. Oftentimes, an arbitration agreement will contain such language

in the body of the agreement itself. Regardless, you must be prepared to explain the relationship

and offer proof at the time of filing the complaint or when the motion to compel arbitration is

filed. The United States Supreme Court has interpreted the FAA’s use of the phrase “involving

commerce” as the functional equivalent of the term “affecting commerce” – a statutory term of

art that signals the broadest possible exercise of Congress’s Commerce Clause power.16 In

Allied-Bruce, for example, the arbitration agreement at issue was between an Alabama

homeowner and the local office of a pest control company.17 In rejecting a legal standard that

looked solely to the contemplation of the parties, the Supreme Court held that the FAA’s use of

the words “involving commerce” encompasses more than just activities within the actual flow of

interstate commerce, and should be read more broadly as any contract “affecting commerce.”18

The Court adopted a “commerce in fact” standard, meaning that a transaction that in fact

involved interstate commerce was sufficient.19 The Court found that the contract at issue

16 See Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 268-69 (1995). 17 Id. at 268. 18 Id. at 273-74. 19 Id. at 277-78.

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satisfied that standard because of the pest control company’s multi-state nature and its use of out-

of-state materials.20

Eight years later, the Supreme Court reaffirmed the Allied-Bruce standard in summarily

reversing a contrary ruling issued by a state supreme court.21 In doing so, the Court found that

a debt-restructuring agreement was a contract “evidencing a transaction involving commerce”

because the debt at issue was secured by the defendant-company’s assets, which included goods

assembled from out-of-state parts and raw materials.22 The Court also explained that the

individual debt-restructuring transactions, taken alone, did not have to have a substantial effect

on interstate commerce in order for the FAA to apply.23 Instead, only the “general practice”

needs to “bear on interstate commerce in a substantial way.”24

Further, courts endorse the notion that arbitration agreements must be broadly

interpreted, as a narrow reading of the agreements would hinder the strong federal policy

encouraging arbitration.25 Put differently, the agreement must be read in favor of the

agreement’s enforceability. The Fourth Circuit put it well in American Recovery: “we may not

deny a party’s request to arbitrate an issue unless it may be said with positive assurance that the

arbitration clause is not susceptible of an interpretation that covers the asserted dispute.”26

20 Id. at 282. 21 See Citizens Bank v. Alafabco, Inc., 539 U.S. 52 (2003) (per curiam). 22 Id. at 56-57. 23 Id. at 56. 24Id. at 57; See also See, e.g., Fosler v. Midwest Care Ctr. II, Inc., 928 N.E.2d 1, 14-15 (Ill. Ct. App. 2010) (relying on affidavit filed by nursing facility’s administrator demonstrating that, among other things, the nursing facility received Medicare payments for the resident’s treatment and purchased medical equipment from out-of-state vendors); Ruszala ex rel. Mizerak v. Brookdale Living Cmtys., Inc., 1 A.3d 806, 817 (N.J. Super. Ct. App. Div. 2010) (relying on affidavit submitted by in-house counsel for the healthcare facilities, which explained that the facilities purchased food, medicine, and medical equipment primarily from out-of-state vendors); Bales v. Arbor Manor, No. 4:08-CV-3072, 2008 WL 2660366, at *6 (D. Neb. July 3, 2008) (finding requisite nexus with interstate commerce); Rainbow Health Care Ctr., Inc. v. Crutcher, No. 07-CV-194-JHP, 2008 WL 268321, at *5 (N.D. Okla. Jan. 29, 2008) (same). 25 American Recovery Corp. v. Computerized Thermal Imaging, Inc., 96 F.3d 88 (4th Cir. 1996) (explaining that courts will read a narrow arbitration clause to be broader). 26 Id. (citing Warrior & Gulf Navigation Co., 363 U.S. at 582-83, 80 S.Ct. at 1353)(internal citations omitted).

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4 Equitable Estoppel / Third Party Beneficiary Arguments

In many instances, particularly in the health care industry, an arbitration agreement might

be signed not by the plaintiff, but instead by her power of attorney, attorney-in-fact, next friend,

or other “representative.” The first step is to look to the language of the arbitration agreement

itself; often, it will state that the parties intend not only to bind themselves to the agreement, but

also their heirs, successors, and all representatives. If you find yourself in this situation, you

should assert that “[a]rbitration agreements, like other contracts, are enforceable in accordance

with their terms.”27

In addition, you also may argue that Plaintiff must arbitrate her claims because she was

an intended third-party beneficiary of the Arbitration Agreement. While the language differs

from state to state, a third-party beneficiary is a party that the contracting parties intended to

directly benefit.28 The “benefit” confirmed upon a third party can be the remedy of arbitration

itself.29 In the healthcare arena, the argument often can be made that the patient receives the

benefit of medical care, as the patient would not have been admitted to the healthcare facility

without first signing the arbitration agreement.30

In addition to raising the “third party beneficiary” sword, a defendant moving for

arbitration in a situation where a representative of the plaintiff signed the arbitration agreement

27 Munoz v. Green Tree Fin. Corp., 343 S.C. 531, 539, 542 S.E.2d 360, 364 (S.C. 2001) (quoting Volt Info. Sciences, Inc. v. Bd. Of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 476 (1989)). 28 See Helms Realty, Inc. v. Gibson-Wall Co., 363 S.C. 334, 611 S.E.2d 485, 488 (S.C. 2005); Edwards v. Costner, 979 So. 2d 757 (Ala. 2007); Cont'l Cas. Co. v. Am. Nat. Ins. Co., 417 F.3d 727 (7th Cir. 2005); McCutcheon v. THI of S.C. at Charleston, LLC, No. 2:11-CV-02861, 2011 WL 6318575, at *3 (D.S.C. Dec. 15, 2011) (Norton, C.J.); THI of S.C. at Columbia, LLC v. Wiggins, C/A No. 3:11-888-CMC, 2011 WL 4089435, at *6 (D.S.C. Sept. 13, 2011) (Currie, J.); see also THI of N.M. at Hobbs Center, LLC v. Patton, Civ. No. 11-537 LH/CG, 2012 WL 112216, at *8-9 (D.N.M. Jan. 3, 2012) (following Wiggins and similar decisions from other jurisdictions applying analogous third-party beneficiary law). 29 Larsen v. First Bank, 245 Neb. 950, 962, 515 N.W. 2d 804, 813 (Neb. 1994) (citing Alder v. First Nat. Bank & Trust Co., 241 Neb. 873, 491 N.W.2d 686 (1992)); Lauritzen v. Davis, 214 Neb. 547, 335 N.W.2d 520 (1983); Dworak v. Michals, 211 Neb. 716, 320 N.W.2d 485 (1982)). 30 See Id.

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can argue that the plaintiff must arbitrate the claims pursuant to the equitable estoppel doctrine.31

Explaining that “[w]ell-established common law principles dictate that in an appropriate case a

nonsignatory can enforce, or be bound by, an arbitration provision within a contract executed by

other parties,” the Fourth Circuit compelled the parties to arbitration under the doctrine of

equitable estoppel:

We believe that the doctrine of equitable estoppel applies here. Equitable estoppel precludes a party from asserting rights he otherwise would have had against another when his own conduct renders assertion of those rights contrary to equity. In the arbitration context, the doctrine recognizes that a party may be estopped from asserting that the lack of his signature on a written contract precludes enforcement of the contract's arbitration clause when he has consistently maintained that other provisions of the same contract should be enforced to benefit him. To allow [a plaintiff] to claim the benefit of the contract and simultaneously avoid its burdens would both disregard equity and contravene the purposes underlying enactment of the Arbitration Act.32

C. The State Court Motion to Stay

In addition to asking the federal court to stay all state court proceedings via your federal

complaint, a motion to stay the state court proceedings pending the outcome of the federal suit

also should be filed in state court at the same time the federal suit is brought. This motion should

explain that the defendant has filed an action in the District Court to determine the validity of an

arbitration agreement entered into between the parties. Be sure to ask the state court to stay the

case until the district court has made a final decision and the appellate process (if any) has been

exhausted. Section 3 of the FAA, entitled “Stay of proceedings where issue therein referable to

arbitration,” states the following:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an

31 International Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 418 (4th Cir. 2000). 32 Id. at 417-18 (internal citations and quotations omitted).

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agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

Citing this statutory provision, courts have held the “FAA clearly requires a court stay

‘any suit or proceeding’ pending the arbitration of ‘any issue referable to arbitration under an

agreement in writing for such arbitration’ upon the application of one of the parties.”33 Filing

this state court motion to stay is not “overkill” despite the fact that you have already asked the

federal court to stay the state proceedings. By filing the state court motion, you are effectively

closing another one of the plaintiff’s lawyer’s “doors” for making a waiver argument.

As stated ad nauseum, both federal and state policy favors the arbitration of disputes.

Even when a party to the lawsuit is not a party to the arbitration agreement, it “may be advisable

to stay litigation among the non-arbitrating parties pending the outcome of the arbitration.”34

Both state and federal courts also possesses inherent authority to issue a stay, and the decision to

stay a case for the non-arbitrating parties is left to a court’s discretion.35

II. THE STATE COURT APPROACH

You also have the option of attempting to enforce the arbitration agreement in state court

instead of federal court. There are good reasons to consider this approach if the judge in your

jurisdiction are open to arbitration. Maybe the state where you practice already has a strong

history of enforcing arbitration agreements. Maybe you are uncomfortable with the idea and cost

33 Stokes v. Metro. Life Ins. Co., 351 S.C. 606, 612, 571 S.E.2d 711, 715 (Ct. App. 2002). 34 Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 21, 103 S. Ct. 927, 939 (1983). 35 Id. See also, Landis v. N. Am. Co., 299 U.S. 248, 254-255, 57 S. Ct. 163, 166 (1936)(“[T]he power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants. How this can best be done calls for the exercise of judgment, which must weigh competing interests and maintain an even balance.”).

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of filing a federal suit against a state court plaintiff. Maybe you simply do not want to engage in

ancillary federal court litigation and bear those expenses when you already are in state court.

All are valid grounds for deciding to move to compel arbitration in state court. Instead of

filing a complaint against the plaintiff, you simply would move to dismiss the plaintiff’s

complaint in state court on the basis that there is an enforceable arbitration agreement under the

FAA for the same reasons cited above. After all, the FAA and its expression of the federal

policy favoring arbitration are binding in state courts, too.36 If you decide to pursue the state

court approach, be sure to follow the same basic steps set forth in Section I above, including

sending the Plaintiff a letter demanding arbitration. After the demand letter is rejected, simply

file your Motion to Dismiss Plaintiff’s Complaint, Enforce Arbitration, and Stay State Court

Proceedings in state court based upon the application of the FAA described above.

III. THE NON-JURY ROUTE—APPRECIATION OPTION?

Finally, it may be a viable option to have your case heard by a judge in a non-jury trial.

This route can be appealing to all parties. First, it allows the dispute to be heard by a

sophisticated neutral whose credibility presumably is beyond reproach. The trial will proceed

pursuant to your state’s tried and true evidentiary and procedural rules, which all the parties will

be familiar with and comfortable. Finally, it can be cheaper option for both parties: neither party

will have to carry the costs of paying an arbitrator; instead, you only will be subject to your

state’s applicable court filing fees and the traditional costs of litigation. You also can avoid a

long fight about the selection of an arbitrator.

This route can potentially benefit the defense in many similar ways that arbitration does.

First, it affords the advantage of avoiding the “runaway jury” scenario. However, a liked judge

could become a plaintiff’s best friend. Next, the non-jury option may be worthy of 36 Zabinski v. Bright Acres Associates, 346 S.C. 580, 590, 553 S.E.2d 110, 115 (2001).

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consideration if you believe you have a strong summary judgment argument, as the judge will be

familiar with or can be quickly educated by the parties as to the applicable law and more inclined

to seriously consider pre-trial dispositive motions. On the other hand, a non-jury trial likely will

not provide the same level of privacy that an arbitral proceeding would, and it also will also give

both sides the full right of appeal not preset in arbitration. Additionally, the non-jury route may

give better evidentiary protection than an arbitrator who will have to see the adverse evidence in

order to exclude it.

To utilize this approach you of course must have the agreement of plaintiff’s counsel.

The state circuit judge then will need to order that the case be removed from the jury roster and

placed on his or her non-jury roster. This is usually done by consent order. Some judges may be

loath to do so, as it likely will require more “intellectual work” on their part then a standard jury

trial. Accordingly, the non-jury option should be explored only when the case is particularly

complex and where its legal issues conceivably may overwhelm the arbitrator.

ARBITRATION PROCEDURES BEFORE AND AT TRIAL

Now that you have successfully compelled arbitration, what procedure must you follow

in actually arbitrating the case? The first step is to look to the text of the arbitration agreement.

Many agreements will specify that the rules of certain arbitration programs will apply to all

proceedings. For example, arbitration agreements in the healthcare arena often mandate that the

American Health Lawyers Association’s (AHLA) arbitration program or the American

Arbitration Association (AAA), Judicial Arbitration and Mediation Service (“JAGS”) or the

National Arbitration Forum (“ARF”) and their attendant rules and procedures will apply to the

arbitration. Each will have its own unique set of rules. Read then rules. In addition to having

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their own set of procedural and evidentiary rules, these organizations have their own cadre of

appointed neutrals, electronic filing systems, and fee schedules. You must read these rules and

decide if it makes sense to use all of them. You and opposing counsel are free to make

agreements related to the use of the rules. If you do go make sure you confirm any changes in

writing and serve a Consent Order from your arbitrator.

Many arbitration agreements will not mandate that a particular organization be used to

arbitrate your case. Instead, many arbitration agreements will simply state that the federal rules

of civil procedure or your state’s respective procedural rules govern the dispute. However, and

as more fully discussed below, such provisions are not always set in stone and the rules of civil

procedure (especially those regarding discovery) sometimes can be “bent” to your advantage.

Also, such arbitration agreements invariably include a provision regarding the manner in

which the arbitrator(s) are selected. These provisions come in various iterations. Sometimes

they require that the parties must select one arbitrator by agreement and, if no agreement can be

reached, that a state court judge appoint an arbitrator of its choosing. More often, the provision

will ask each party to select an arbitrator. Those arbitrators in turn will in turn select a third

arbitrator with that group serving as your arbitration panel.

Finally, always remember that arbitration is a matter of contract between the parties.

After the arbitration agreement is enforced by the court, consider sitting down with plaintiff’s

counsel and explore the idea of reaching a post-arbitration agreement that is outside of the four

corners of the arbitration document itself. Maybe each party wants to engage in full, traditional

discovery and have a panel of arbitrators decide the case instead of the number called for by the

arbitration agreement. Maybe the parties want to limit the number of witnesses to be called

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during the arbitral proceedings. If the parties can reach an agreement, put it in writing and have

the arbitration operate under your own terms.

I. PICKING YOUR ARBITRATOR(S)

The selection of a fair arbitrator with knowledge of the subject matter of your dispute is

essential to your case. This can also be a difficult and time consuming process. In the event that

the arbitration agreement calls for the selection of one arbitrator per party (with those arbitrators

then selecting the third), you must select a lawyer with strong, defense-oriented credentials.

Plaintiff’s attorney, of course, will select an equally plaintiff-oriented lawyer. Your neutral must

understand the selection of the third is critical. When the two arbitrators confer to select a third

member of the panel, your selection must serve as a favorable ally capable of convincing the

Plaintiff’s selection to agree to a truly neutral third arbitrator to round out your panel. Further,

ensure that none of the arbitration panel has a potential conflict of interest. If your selection has

some connection to the parties to the dispute or your clients, plaintiff’s counsel likely will

petition the court or the other arbitrators to have the arbitrator removed. On the flip side, if

plaintiff’s selection has any connection to the plaintiff’s litigation – such as previously serving as

co-counsel with the plaintiff’s lawyer in some past matter – you always have the option of

petitioning to have the arbitrator removed as well.

As noted above, arbitration agreements often call for the parties to come to an agreement

as to who will serve as the sole arbitrator. Be realistic in your proposal of an arbitrator; your

opponent almost certainly will not agree to a lawyer practicing exclusively defense work

adjudicating the dispute. Remember that in the event that the parties cannot reach an agreement

as to who will serve as the arbitrator, it likely will be a state judge who will appoint the

arbitrator. Having a judge select the arbitrator does not guarantee that the selection will be to

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your liking or help advance your case. Work with opposing counsel and try to keep control of

the selection process if at all possible.

I. DISCOVERY UNDER THE FAA

One of arbitration’s great benefits to the client is the ability to limit discovery and the

costs associated therewith. The text of the Federal Arbitration Act (again, referred to herein as

the “FAA” or the “Act”) reflects the overarching principle that arbitration is a matter of private

contract and, consistent with that text, courts must rigorously enforce arbitration agreements

according to their terms.37 Consequently, parties may contract to provide for as expansive or

limited discovery as they desire. Assuming no overreaching by a party, coercion, or duress, the

courts should respect what the party’s contract for in terms of discovery.38 Indeed, the FAA does

not prevent enforcement of agreements to arbitrate under different rules than those set forth in

the Act itself, so long as the rules do not undermine the goals and policies of the FAA to ensure

the enforceability, according to their terms, of private agreements to arbitrate.39

As emphasized above, parties can contract for as much or little discovery as they wish.

The FAA and its limited discovery provision will apply if the parties’ agreement involves

commerce or if the parties have elected to use another law that is preempted by the FAA.40 They

also will apply when no other set of discovery rules are agreed upon by the parties or set by the

organization that is handling the arbitration (such as the AHLA or JAMS, discussed above).

Within the FAA, § 7 governs discovery and allows arbitrators to punish the failure to obey a

discovery directive. In pertinent part, § 7 reads:

37 Am. Exp. Co. v. Italian Colors Rest., 133 S. Ct. 2304 (Scalia, J) (2013); 9 U.S.C.A. § 2 38 Continental Airlines, Inc. v. Mason, 87 F.3d 1318 (9th Cir. 1996). 39 Osteen v. T.E. Cuttino Constr. Co., 315 S.C. 422, 434 S.E.2d 281 (1993). 40 9 U.S.C.A. § 1-14. The language “involving commerce” is to be broadly interpreted. Allied-Bruce Terminix Co. v. Dobson, 513 U.S. 265, 273-78 (1995).

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The arbitrators may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with them any book, record, document, or paper which may be deemed material as evidence in the case…Said summons shall issue in the name of the arbitrator or arbitrators…and shall be directed to the said person and shall be served in the same manner as subpoenas to appear and testify before the court.

… If any person or persons so summoned to testify shall

refuse or neglect to obey said summons, upon petition the United States district court for the district in which such arbitrators…are sitting may compel the attendance of such persons before said arbitrator...in the same manner provided by law for securing the attendance of witnesses…for neglect or refusal to attend in the courts of the United States.

No other FAA provision discusses discovery, and discovery is thus clearly limited. To be sure,

parties to a private arbitration agreement pass on “certain procedural rights attendant to formal

litigation in return for a more efficient and cost-effective resolution of their disputes.”41 A

hallmark of arbitration is a limited discovery process.42 Indeed, parties to a private arbitration

agreement “relinquish the right to certain procedural niceties which are normally associated with

a formal trial…one of these accoutrements is the right to pre-trial discovery.”43 Put differently,

the “essence of arbitration is its freedom from the formality of ordinary judicial procedure.”44

A. Document and Deposition Discovery

1. Discovery Regarding Non-Parties

Document and deposition discovery under § 7 is an issue that has divided the federal

appellate circuits. The Fourth Circuit allows document and deposition discovery, but only in

limited circumstances.45 In COMSAT, the Fourth Circuit held that § 7 does not grant arbitrators

41 See Burton v. Bush, 614 F.2d 389, 390-91 (4th Cir. 1980). 42 Id. at 391. 43 Burton, 614 F.2d at 391. 44 Harvey Aluminum, Inc. v. United Steelworkers of Am., AFL-CIO, 263 F. Supp. 488, 491 (C.D. Cal. 1967) (quoting Canuso v. City of Philadelphia, 326 Pa. 302, 307, 192 A. 133, 136). 45 COMSAT Corp., v. National Science Foundation, 190 F.3d 269, 275 (4th Cir. 1999).

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the power to order pre-hearing depositions or document discovery against non-parties absent a

showing of “special need or hardship” by the party seeking discovery.46 Instead, § 7 empowers

arbitrators to compel appearance and the production of documents only at the hearing itself. This

narrow reading was based on the Court’s understanding that the FAA, by its plain language, does

not authorize pre-hearing discovery against non-parties. The Court explained that this limited

discovery process is fundamental to ensuring that arbitration remains an efficient alternative to

courtroom litigation.

The COMSAT Court did not define what constitutes a “special need,” opting instead to

create only a floor: “at a minimum, a party must demonstrate that the information it seeks is

otherwise unavailable.”47 Since COMSAT was decided and at the time of this writing, only one

district court in the Fourth Circuit has considered § 7 and its “special need” standard. In

Gresham v. Norris, a former employee who brought suit for alleged sexual harassment, wrongful

discharge, and various other torts petitioned the district court to compel attendance of a witness

at a deposition in connection with a mandatory arbitration proceeding.48 The Respondent was

not a party to the arbitration proceeding, but the Petitioner believed Respondent was a witness to

conduct underlying her claim and also was a victim of sexual harassment at the hands of the

same employer. Respondent was subpoenaed by Petitioner, and Respondent refused to honor the

subpoena. The District Court held that the petition did “not include the requisite showing of

special need or hardship.”49 Recognizing the COMSAT decision, the District Court wrote that

the Fourth Circuit was clear in its ruling that a petitioner’s “special need” must be “more than

46 Id. at 275-78. 47 Id. at 276. 48 304 F.Supp, 2d. 795 (ED Va. 2004) 49 Id. at 275.

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simply a general desire to conduct discovery.”50 The Petition to Compel therefore was denied,

with the District Court noting that FAA still allowed the arbitrator to issue a subpoena requiring

the Respondent to testify at the arbitration hearing. Id.

Our federal appellate courts are not consistent in their interpretation of the FAA’s

discovery provision. Unlike the Fourth Circuit, the Eighth Circuit allows document discovery

from non-parties and does not have a “special need” standard.51 In Security Life Ins. Co., the

Court reasoned that arbitral efficiency is furthered when the parties can review and digest

documentary evidence before the arbitration hearing, though deposition discovery was not

allowed. The Sixth Circuit likewise suggested that the FAA implicitly permits arbitrators to

subpoena documents prior to a hearing.52

In contrast, the Second and Third Circuits do not allow any document discovery.53 Both

Courts explained that the language of § 7 is straightforward and clearly does not allow arbitrators

to issue pre-hearing subpoenas for documents or depositions to non-parties. Life Receivables

even went so far as to state that arbitrators cannot order third party production even when the

third party is related to a party or a signatory of the arbitration agreement.

B. Enforcing a Subpoena Issued to a Non-Party

The next discovery oddity in arbitration proceedings regards enforcing a subpoena issued

to a non-party. The FAA mandates that subpoenas be issued only by an arbitrator and can be

enforced by the court in the federal district where the arbitrator sits.54 Case rulings concerning

this issue are very conflicting—particularly because the FAA does not contain a Federal Rules of

50 Id. at 276. 51 In re Security Life Ins. Co. of America, 228 F.3d 865, 870-71 (8th Cir 2000). 52 American Federation of Television and Radio Artists, AFL-CIO v. WJBK-TV, 164 F.3d 1004, (6th Cir. 1999). 53 Hay Group, Inc. v. EBS Acquisition Corp., 360 F.3d 404, 408 (3d Cir. 2004); Life Receivables Trust v. Syndicate 102 at Lloyd’s of London, 549 F.3d 865, 870-71 (2d Cir. 2008). 54 9 U.S.C.A. § 7.

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Civil Procedure Rule 45 objection/protective order requirement. As such, a non-party witness

may choose to ignore the subpoena.55 The FAA does permit a party to seek enforcement of a

subpoena from a federal court in the district which the arbitration is pending.56

The issue becomes tricky when the witness, for example, is located in Pennsylvania but

your arbitration proceeding is taking place in Chicago. That exact issue was considered in

Agmen, Inc. v. Kidney Center of Delaware County, Ltd., 1994 WL 594372 (E.D. Pa. 1994).

There, Amgen was a party to an arbitration being held in Chicago, and it filed a motion to

compel compliance with a subpoena issued to a non-party witness located in the Eastern District

of Pennsylvania. The Pennsylvania district court held that Amgen filed its motion in the wrong

district: “[s]ince the arbitrator in the underlying arbitration is sitting in Chicago, it was

incumbent upon Amgen, pursuant to the plain language of Section 7 of the Federal Arbitration

Act, to bring its petition to compel compliance in the United States District Court for the

Northern District of Illinois.”

When Amgen presented its motion to the district court in Chicago, it faced a new and

different problem. The Court held that under § 7, an arbitrator sitting in Chicago had no more

power to issue and enforce a subpoena issued to a person located in the Eastern District of

Pennsylvania than did a district court in the Northern District of Illinois. The Court asserted that

the district court in the Northern District of Illinois could issue and enforce a subpoena to a

person within (a) the Northern District; (b) 100 miles of the Northern District; or (c) any place in

Illinois where Illinois law permits service of subpoenas. Neither the Northern District of Illinois

55 COMSAT Corp., 190 F.3d at 276. 56 If any person or persons so summoned to testify shall refuse or neglect to obey said summons, upon petition the United States district court for the district in which such arbitrators…are sitting may compel the attendance of such persons before said arbitrator...in the same manner provided by law for securing the attendance of witnesses…for neglect or refusal to attend in the courts of the United States. 9 U.S.C.A. § 7.

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nor the arbitrator, however, could issue or enforce a subpoena directed to a witness located in

Pennsylvania. This is quite the limitation.

Under Rule 45 of the Federal Rules of Civil Procedure, a party who has filed suit in in

one state can serve a subpoena on a witness located in some other judicial district or state, so

long as the subpoena issues from the district court in which that witness is located and any

enforcement proceedings are brought in the district where the witness is located. Under § 7,

however, arbitrators can issue subpoenas only from the federal district in which they are sitting,

and they must bring any action to enforce their subpoena in that district. Thus, if the witness is

located in a judicial district or state other than the one where the arbitrators sit, they have no

power to issue or enforce a subpoena served on that witness.

Since Agmen, two circuit courts have considered the geographic limits on subpoenas and

reached different conclusions. In Security Life, the Eighth Circuit ruled that the territorial

limitation in Rule 45 does not apply to subpoenas for documents issued by arbitrators.57 The

Second Circuit took a wholly different approach in Dynegy Midstream Services, LP v.

Trammochem, 451 F.3d 89, 94 (2d Cir. 2006). It asserted that § 7 specifically states that

arbitrators’ subpoenas are to be “served in the same manner as subpoenas to appear and testify

before the court.” By way of example, the Court explained that a district court in the S.D.N.Y.

could not issue a subpoena to a witness in Houston, and likewise an arbitrator sitting in the

S.D.N.Y. could not do so either.

Practically, most parties to arbitration will want some ability to issue subpoenas. If

possible, see if the opposing party will argue to issue subpoenas under the state court action (if

there was one) prior to an order compelling the case to arbitration. A consent order allowing

57 228 F.3d at 868.

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subpoenas by consent may be an effective tool for both sides’ efforts to secure third party

documents.

C. Role of the Court in Arbitration Discovery

Courts generally take a “hands-off” approach when it comes to discovery conducted in

arbitration.58 They do not appear eager to interfere with the arbitration proceeding or the role of

the arbitrator in controlling discovery.59 Occasionally, a court even will interpret a party’s use

of the court for discovery purposes as a waiver of the right to arbitrate the dispute.60 Therefore,

it is rare that a party to arbitration will find adequate relief from the court when it is unhappy

with an arbitrators’ decision regarding some aspect of discovery.

There are times, however, when a court will interfere in an arbitration’s discovery

dispute. The federal courts will do so only in “extraordinary circumstances,” such as when the

evidence likely will be lost if discovery does not occur right away. The “extraordinary

circumstances” standard is difficult to meet, however, and the federal courts generally maintain

their policy of not interfering with arbitration.61

D. A Common Argument Against Limited Discovery

Given the limited discovery inherent in arbitrations, a party often will squirm to find

some loophole allowing for more traditional, trial-like discovery. One clever tactic is for a

plaintiff to argue that either the federal or applicable state rules of civil procedure should govern

the arbitration proceedings as a whole, as the rules would act as an appropriate guideline as to

58 See, e.g. Fueling Advanced Technologies v. Ford Motor Co., 1997 WL 733897 (N.D. Ill.) (holding that there is no basis for compelling the parties to engage in pre-arbitration discovery above and beyond what was already agreed to by the parties). 59 See Thompson v. Zavin, 607 F.Supp, 780, 783 (C.D. Cal. 1984) (holding that once there is a stay of proceeding pending arbitration, the court will not interfere with arbitrators’ decisions). 60 See Joseph L. Forstdadt, Discovery in Arbitration, ADR & THE LAW 52 (20th ed., 2006). 61 See Id.

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motions practice and the resolution of discovery disputes. Accompanying that argument likely

will be standard interrogatories and requests for production

A defense attorney seeking to limit discovery should reply that the rules of civil

procedure are applicable only where the FAA is silent as to a procedural issue.62 As stated,

supra, the FAA contains its own discovery procedure; accordingly, a party who elects to arbitrate

may not simultaneously invoke the normal discovery procedures used in courts.63 Discussing the

issue of whether oral depositions may be taken and interrogatories going to the merits of the case

can be propounded in matters referable to arbitration, the federal court for the Southern District

of New York ruled that:

By voluntarily becoming a party to a contract in which arbitration was the agreed mode for settling disputes thereunder respondent chose to avail itself of procedures peculiar to the arbitral process rather than those used in judicial determinations. ‘A main object of a voluntary submission to arbitration is the avoidance of formal and technical preparation of a case for the usual procedure of a judicial trial.’64

You should be prepared to explain that arbitration, by its very nature, does not lend itself

to discovery outside the parameters set by § 7: “[t]he fundamental differences between the fact-

finding process of a judicial tribunal and those of a panel of arbitrators demonstrate the need of

pretrial discovery in the one and its superfluity and utter incompatibility in the other.”65 As

Judge Learned Hand eloquently stated,

when [parties] have adopted [arbitration], they must be content with its informalities; they may not hedge it about with those procedural limitations which it is precisely its purpose to avoid. They must content themselves with looser approximations to the

62 Application of Deiulemar Compagnia di Navigazione S.P.A. v. M/V Allegra, 198 F.3d 473, (4th Cir. 1999). 63 See 9 U.S.C. § 7. 64 Penn Tanker Co. of Del. v. C. H. Z. Rolimpex, Warszawa, 199 F. Supp. 716, 718 (S.D.N.Y. 1961) (quoting 1 Wigmore, Evidence § 4(e) (3d ed. 1940 65 Commercial Solvents Corp v. Louisiana Liquid Fertilizer Co, 20 F.R.D. 359, 362 (S.D.N.Y. 1957) (emphasis added).

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enforcement of their rights than those that the law accords them, when they resort to its machinery.66

Finally, a defense attorney attempting to limit discovery should argue that arbitrators

alone are afforded the power to conduct discovery by calling witnesses and subpoenaing tangible

evidence and documents. 9 U.S.C. § 7. This power is not extended to the parties to the

arbitration.67 Put simply, because an arbitrator controls discovery pursuant to the strictures of §

7, Plaintiff thus has no right to serve discovery requests upon Defendants.

CONCLUSION

The use and popularity of arbitration agreements in the healthcare and professional

liability settings is on the rise. These agreements are generally disliked by the plaintiff’s bar, and

the national media has recently investigating their effect on ordinary citizens.68 Defense lawyers

need to be able to educate their client on the pros and cons of arbitration agreements, and they

must be prepared to enforce them if deemed appropriate. They can be effective tools for defense

counsel, but can also be ripe with traps for the unwary. Please feel free to contact the authors

with any questions, concerns, or suggestions.

66 Am. Almond Products Co. v. Consol. Pecan Sales Co., 144 F.2d 448, 451 (2d Cir. 1944). 67 Burton, 614 F.2d at 390-91; CIGNA HealthCare of St. Louis, Inc. v. Kaiser, 294 F.3d 849 (7th Cir. 2002) (“[F]or the sake of economy and in contrast to the practice in adjudication, parties to an arbitration do not conduct discovery; the arbitrators do”). 68 See Jessica Silver Greenberg and Robert Gebeloff, Arbitration Everywhere: Stacking the Deck of Justice, NEW YORK TIMES (October 31, 2015) http://www.nytimes.com/2015/11/01/business/dealbook/arbitration-everywhere-stacking-the-deck-of-justice.html?_r=0 Suing a Nursing Home Could Get Easier Under Proposed Federal Rules – National Public Radio http://www.npr.org/sections/health-shots/2015/10/19/449957318/suing-a-nursing-home-could-get-easier-under-proposed-federal-rules

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